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Consider the following? bonds: Bond Coupon Rate?...

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Question

Accounting

Consider the following? bonds:

Bond

Coupon Rate? (annual payments)

Maturity? (years)

A

?0%

14

B

?0%

10

C

2?%

14

D

7?%

10

a. What is the percentage change in the price of each bond if its yield to maturity falls from

5%

to

4?%?

b. Which of the bonds

Aminus?D

is most sensitive to a? 1% drop in interest rates from

5?%

to

4?%

and? why? Which bond is least? sensitive? Provide an intuitive explanation for your answer.

Note?:

Assume annual compounding.

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